If you want an investment that offers relatively attractive yields today as well as some protection against rising rates tomorrow, consider mortgage-backed securities. Most mortgage-backed securities are issued by federal agencies such as:
* The Government National Mortgage Association (“Ginnie Mae”),
* The Federal National Mortgage Association (“Fannie Mae”), and
* The Federal Home Loan Mortgage Corporation (“Freddie Mac”).
The credit quality of such securities is excellent–in fact, Ginnie Maes are guaranteed by the federal government.
The above-named federal agencies buy mortgages from various lenders, package them into pools of multiple mortgages, and then sell interests in these pools to investors. Therefore, investors step into the shoes of mortgage lenders, collecting monthly interest from many homeowners.
Mortgage interest rates tend to be higher than the interest paid by Treasury securities, so investors benefit from higher yields. In the spring of 2004, for instance, Ginnie Maes were priced to yield 5.5 percent while 10-year Treasuries paid around 4.5 percent. The uncertainty of receiving prepayments at various times means that mortgage-backed securities typically pay a premium, relative to more predictable, fixed-maturity Treasury bonds.